If you take away one lesson from this article, it’s this — keep your personal credit as separate from your business credit as possible.
CIBCMay. 17, 2021
Are you a new business owner? Are you struggling to understand the differences between personal credit and business credit, and which you should choose for financing your business?
If you answered “yes” to the previous questions, then this article is for you. All start-ups need some form of personal investment to get off the ground and many entrepreneurs automatically use their own personal credit to finance their business. The concern with this approach is that your personal credit score can impact your ability to qualify for a business loan or credit. Banks often review your personal credit history when you’re applying for a business loan or credit, so the best place to begin is by amplifying your personal credit score.
DID YOU KNOW?
37% of Canadian business owners are using their personal savings to finance their business
34% are using credit cards — those numbers jump to 44% and 42% respectively for businesses with fewer than 4 employees1
What is personal credit?
Your personal credit can be assessed in two ways:
Your credit rating – measures how dependable you are in repaying your debts.
Your credit score – a number from 300 – 900 which measures your credit risk at a particular point in time. A score of 690 and above is considered good credit. The higher your score, the lower the risk for the lender, so it's easier to get approved for a new loan.
How can you build personal credit?
Here are some strategies you can use to help build your personal credit score, whether you’re just starting out or need help boosting your score after it’s taken a hit.
1. Pay your bills on time
Your payment history makes up 35% of your credit score, so make sure you always pay your bills in full on time, or at least the minimum amount.
2. Vary the types of credit you use
If you’ve successfully managed a diverse range of credit products like a line of credit, a credit card, and a mortgage, it will improve your credit.
3. Don’t be scared of purposeful new credit opportunities
Your overall credit score will change each time you take on new credit products. Just don’t take on more than you can handle. Make it purposeful and ensure you can make the required payments.
4. Don’t overextend yourself
Just because you’ve been approved for a certain amount of credit, it doesn’t mean you should use all of it. It can look better on your overall credit portfolio if you have not “needed” to use all of the credit provided to you. Avoiding overdoing it can also make your credit payments more manageable.
5. Know your current credit score and watch for discrepancies
By checking your credit report every so often, you can better manage it and spot discrepancies if they come up. CIBC clients can check their credit score using the CIBC Free Credit Score Service in the CIBC Mobile Banking® App. You can also contact one of Canada's credit bureaus to receive a copy of your credit report by mail, free of charge. For a fee, you can view your credit report online:
Meet with an advisor if you have any questions regarding your credit score or have accumulated debt and are struggling to make your payments. An advisor can help you create a plan to get you back on track.
What’s the difference between personal credit and business credit?
Similarly to personal credit, business credit indicates your ability to pay back debts on time, but in this case it’s payments to your lenders and suppliers. A good business credit score will help you obtain business loans to grow your business, give you access to lower interest rates, and give you more flexibility when paying suppliers.
If you can only take away 1 lesson from this article, let it be this – keep your personal credit as separate from your business credit as possible. This is so important because it minimizes any potential impacts they could have on each other. For example, if you were experiencing financial hardship personally, you wouldn’t want it to interfere with your business credit report.
How can you build business credit?
Building good business credit uses a lot of the same techniques as building your personal credit; pay bills on time, vary the types you use, etc. But there are a few strategies that are unique to building good business credit. They include:
The best way to build credit history, is to start small and apply for either a business credit card or line of credit. Your transaction and payment history will help you build your credit score. Remember, avoid using too much credit, the less credit you use out of the total credit given to you, the higher your credit score becomes.
Get to know your suppliers
It’s important to build a good relationship and rapport with your suppliers. If your supplier isn’t doing so already, request that they report all payments you make to them to different credit agencies. This can help raise your business credit score.
Ready to apply for funding?
Whether you’re looking to fund a one-time purchase, cover day-to-day operating expenses, protect your business from unexpected cash shortfalls, or benefit from a government supported program, check out your borrowing options by visiting our Business Loans and Lines of Credit site and connecting with a business banking expert.